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Tax Tips

States Sue Due To State & Local Tax Limitation

The states of New York, Connecticut, Maryland and New Jersey has sued the U.S. Government in federal court seeking to overturn the $10,000 limit on state and local tax deductions that was enacted as part of P.L. 115-97 (Tax Cuts and Jobs Act).

Under the New Law, individuals are allowed to deduct up to $10,000 in state and local income tax deductions (SALT Tax).  Congress has included a deduction for all or a significant portion of state and local taxes in every tax bill since the enactment of the first federal income tax in 1861.

The states argue that the SALT deduction is essential to prevent the federal tax power from interfering with the States’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more.  They argue that the restriction on deductibility of state taxes violates the Tenth Amendment as it “deliberately seeks to compel certain states to reduce their public spending.

The complaint alleges that residents of the plaintiff states will see a significant increase in their federal taxes as a result of the cap but will receive the least benefit from the TCJA. The complaint state the limit will cause significant and irreparable hard to the states and their residents. The complaint asks the court to declare the cap on the state and local tax deduction unconstitutional and to issue an injunction barring its enforcement.

It may go all the way to the Supreme Court and more states may get involved.  If you want to see what effect the TCJA has on 2018, please call our office.

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Entertainment & Transportation – The New Law

Now that the tax rules are in place, business owners are coping with understanding and implementing the changes. The goal of lowering taxes, primarily for businesses, needs to be tempered by eliminating certain business deductions or individual income exclusions so that the federal revenue does not decline too much. Public Law 115-97, known as the Tax Cuts and Jobs Act (TCJA) became law on December 22, 2017. Many of the new rules took place just 10 days later on January 1, 2018.

Under TCJA, entertainment expenses incurred after January 1, 2018 are not deductible.  Prior to January 1, they were 50% deductible.  Over the years, businesses interpreted these rules broadly and, for the most part, were allowed the 50% deduction.  The IRS has been focusing on spousal travel and convention travel outside the U.S. The IRS agents tended to ignore these expenses except where they were clearly entertainment (e.g. concerts or sports games). Now no amounts are deductible.

One of the most controversial areas and one where guidance is needed is addressing whether business meals with current clients are deductible.  Or, is it considered entertainment? It may seem obvious that when a business owner shares a meal that is not extravagant with a current client where business decisions are discussed, some should be deductible. Taxpayers will prefer to look at the TCJA conference committee report, which describes both the House and the Senate amendments.  It states that “taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business.” It states that this is not the only example so business meals when not traveling may be deductible.

There is still uncertainty on this and professionals are asking the IRS for additional guidance.  You should plan estimated taxes conservatively until more is known.

Parking Benefits are sticky.  The employee benefit is the fair market value of the parking provided and is not taxable to the employee.  However, that cost to the employer is not deductible.  Stay tuned!

 

 

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A Shorter Tax Form for 2018

The IRS is working on a draft version of the 2018 Form 1040 Individual Tax Return.  The new form is reported to be reduced to the size of two half-pages in length and eliminate more than 50 lines. The draft form moves many items that were on the face of the 1040 to various new schedules. The new form has not been officially posted to the website yet.

The first page gathers information about he taxpayer and any dependents and the signatures.  The second page gathers information on the taxpayer’s income, deductions (including the new deduction for pass-through entities), credits and taxes paid.  Many of the items reported on the 1040 will be calculated on various new schedules, which has also not been officially posted on the website. These include:

  Schedule 1 – Additional Income & Adjustments to Income and will include business income, alimony received, capital gains or losses, educator expenses and student loan interest.

*   Schedule 2 – Tax will include such things as tax on a child’s unearned income, the alternative minimum tax and excess premium tax

*   Schedule 3 – Nonrefundable Credits includes foreign tax credits, child and dependent care credits, education credits and the residential energy credit.

*   Schedule 4 – Other Taxes includes household employment taxes, the health care individual responsibility payment, the net investment income tax, and the additional Medicare tax.

*   Schedule 5 – Other Payments & Refundable Credits will include estimated tax payments made, the net premium tax credit and the amount paid with an extension.

*   Schedule 6 – Foreign Addresses & Third Party Designee provide taxpayers a place to list their country, province and postal code as well as information for a third party designee.

Not all the existing schedules are listed on the new forms so we will have to wait and see what other changes are in the works.  Tax planning is so very important with the new Tax Law so please make sure you call your CPA and meet with them.

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Supreme Court Overturns Quill Decision! – What Does This Mean?

The Supreme Court today, in a 5-4 decision, came down on the side of the states and overturned the Quill Decision.  This grants states greater power to require out-of-state retailers to collect sales tax on sales to in-state residents.  This is a big deal for states.

At issue was the court 1992 Decision in Quill which established the physical presence for sales and use tax nexus.  That was before the surge of online sales and states have been trying to find constitutional ways to collect sales tax from remote sellers to residents in those states. The Quill Decision stated that those retailers had to have a “physical presence” or “nexus” in the state to be forced to collect and remit sales tax to a state. The Supreme Court said Quill was “out of date”.

States like South Dakota will now be allowed to require sellers that are selling substantial amounts of product into the state to collect and remit sales tax. This may be good for states.  However, the small “mom & pop” retailers would have to collect and remit sales to how many states? We may see litigation regarding these small online retailers about the amount of sales necessary to impose the collection obligation on them.  It may even be on a case by case basis….we shall see!

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Are You Trading in Cryptocurrency

The Internal Revenue Service issued a reminder Friday to taxpayers that they need to report any income from gains they get from virtual currency transactions on their tax returns.

The move comes after the IRS forced one of the largest cryptocurrency exchanges in the world, Coinbase, to send information on 13,000 of its users to the IRS last month after a legal battle involving the use of “John Doe” summonses.  That mean if you have engaged in transactions involving Bitcoin, Ethereum, and other digital currencies, you are expected to report those gains to the IRS.

The IRS pointed out that virtual currency transactions are taxable by law, similar to transactions involving other personal property.  The IRS issued guidance in 2014 in Notice 2014-21 spelling out the agency’s position on digital currency transactions for taxpayers and tax preparers.

The IRS warned Friday that taxpayers who do not properly report the income tax consequences of their cryptocurrency transactions fact the possibility of tax audits, and could even be liable for penalty and interest charges when appropriate.

Under Notice 2014-21, virtual currency is treated as property for federal tax purposes, so the general principles that apply to property transactions also apply to the 1,500 or so known varieties of cryptocurrency.  That means reporting payments made with virtual currency.

Payments made to independent contractors and other service providers are also taxable and self-employment tax rules apply. Have you been trading in cryptocurrency?

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How To Avoid Tax Traps with Inherited IRAs

An  inherited Individual Retirement Account (IRA) can be a tremendous boon to the beneficiary.  Who can’t use extra money in retirement!  Most inherited IRAs are cashed out within six months of the death of the family member.  If you do cash it out, there is no way for planning tax strategies! Without proper planning, federal and state taxes can take a sizable bite from the proceeds!

Options for Inherited IRAs:

  •  Take a lump sum distribution of the entire balance
  •   Roll the inherited IRA over into a new account and take the distributions over the longer of the life expectancy of the beneficiary or the decedent.

If the account owner died before reaching the date for RMDs (Required Minimum Distributions), the beneficiary has a third option of withdrawing all the funds by the end of the year containing the fifth anniversary of the decedent’s death (The Five Year Rule). In this case, the life expectancy of the beneficiary must be used.

Keep the Beneficiary Designation Up To Date!

Marriage, divorce and the birth of children can change estate plans.  The IRA will pass by beneficiary designation and not the Will.  Please make sure you keep the beneficiary as you want it.

Titling An Inherited IRA:

An inherited IRA must be titled with both the name of the decedent and the beneficiary plus the word “inherited”. For example, one might title an inherited IRA as “Jane Doe, deceased September 30, 2017, F/B/O Jimmy Doe, beneficiary”.  If you just change the name on the IRA, that is a “cash out” so DO NOT just retitle the inherited IRA to the beneficiary. Retitling the account is best done at the brokerage where the decedent held the IRA before the beneficiary rolls it over to his or her own brokerage.

If Decedent Had Turned 70 1/2 Years of Age and Started RMDs:

If the decedent had already turned age 70 1/2 and started taking required minimum distributions, the beneficiary MUST take the required minimum distribution before the end of that year or there is a 50% penalty and you still must take the distribution.

ROTH?

Consider the beneficiary’s age and if there are already ample retirement sources, converting the inherited IRA to a ROTH may be the way to go.

Please call our office BEFORE just cashing out the inherited IRA!

 

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